I Ruined the Dollar

John Tamny exposes me:

[Ramesh] Ponnuru has gulped the Kool-Aid as it were, and he’s joined up with a former Treasury economist David Beckworth (presumably one of the minds behind the dollar’s destruction and resulting crack-up during the Bush years)...

How did he know?  I thought the dollar destruction group at Treasury was top secret!  Seriously, this is what passes for thoughtful commentary from the hard-money advocates?  It is remarkable that Tamny's rant against Ramesh Ponnuru and me would be published in Forbes.  It is one of those rare works that is so bad it is good.  

Here a few of the ways it is so bad.  First, Tamny spends about a third of his article showing the problems with classic Monetarism and then attributes them to us.  Apparently, he does not realize we are not Monetarists. It is true we are called Market Monetarists, but this is very different view and a little bit of research on his part would have clued him in on this fact.  Market Monetarists do not believe in targeting monetary aggregates, but rather targeting the growth path of nominal GDP.   Moreover, we believe market signals such as breakeven inflation, stock prices, and exchange rates collectively provide the best indication of the stance of monetary policy.  We take market signals seriously.

Second, Tamny is apparently unaware of the huge literature that shows that gold standard was the key international link that made the Great Depression a global event.  He does not seem to know that those countries that went off the gold standard the soonest were the ones with the quickest recovery.  The classic on this is Barry Eichengreen's Golden Fetters.  A more recent, shorter piece is Doug Irwin's paper on France and the Great Depression.  A key problem with the gold standard is that it has a hard time handling money demand shocks.  If there is a sudden increase in the demand for money, the money supply cannot quickly adjust to offset it and given sticky prices and sticky nominal debt contracts, output must fall.  

Some observers may reply the reason the gold standard caused problems during the Great Depression is because central bankers were not playing by the rules of the game.  The U.S. and France, in particular, were not allowing the price-specie-flow mechanism to work.  They were sterilizing their gold inflows.  Had they not done this the Great Depression may have been avoided.  Maybe so.  But even if true, this success depends on all countries playing by the rules of the game.  Given the lack of international cooperation today, it is hard to believe countries would not cheat again on a modern gold standard like they did in late 1920s  

Third, Tamny invokes Say's Law.  He does not realize that Say's Law holds in  a barter economy, but falls apart in a modern economy when there is monetary disequilibrium.  

Fourth, Tamny thinks ECB monetary policy is just fine.  He is surprised that we would point out ECB monetary policy only works for Germany.  He thinks that if we follow our logic, then we should have independent currencies for each of the 50 states.  He does not realize there is an optimal currency area (OCA) theory that explains these differences. This theory says that if the regions under the same currency do not have similar business cycles then there should be some combination of shock absorbers--labor mobility, flexible wages and prices, fiscal transfers--in place for them to handle the problems of doing a one-size-fits-all approach to monetary policy.  The U.S. has these shock absorbers in place while Europe does not.  For example, hard-hit Florida has received huge federal transfers and it is relatively easy for unemployed individuals to leave Florida for a more prosperous state.  This is not true for Italy or Spain.  That is a big difference. 

There is more, but you get the idea.  Again, shocking to see this represent the hard-money view and get published in Forbes.

P.S. Scott Sumner also replies to Tamny.  He too had a run in with him last year and took him to the shed.